Assignment:
Alexis Harrington received an inheritance of $95,000, and she is considering two speculative investments the purchase of land and the purchase of cattle. Each investment would be for 1 year. Under the present (normal) economic conditions, each dollar invested in land will return the principal plus 20% of the principal; each dollar invested in cattle will return the principal plus 30%.
However, both investments are relatively risky. If economic conditions were to deteriorate, there is an 18% chance she would lose everything she invested in land and a 30% chance she would lose everything she invested in cattle. Alexis does not want to lose more than $20,000 (on average). She wants to know how much to invest in each alternative to maximize the cash value of the investments at the end of 1 year.
a. Formulate a linear programming model for this problem.
b. Solve the model using the Excel
c. How much would the return for cattle have to increase in order for Alexis to invest only in cattle?
d. Should all of Alexis inheritance be invested according to the optimal solution?
e. How much profit would the optimal solution earn Alexis over and above her investment?
f. If Alexis decided to invest some of her own savings along with the money from her inheritance, what return would she realize for each dollar of her own money that she invested? How much her own savings could she invest before this return would change?
g. If the risk of losing the investment in land increased to 30%, how would this change the optimal investment mix?